Unnecessary duopolies

[scorpioncapital]

Does anyone understand why some cyclical industries end up with a kind of duopoly instead of a fragmented market? I mean something like Intel/AMD for most personal (and even server) computing vs say oil and gas producers. And also why such duopolies are still very cyclical and price sensitive despite there being few alternatives.

[BG2008]

Can you list more examples?

[scorpioncapital]

sure COHR and IPGP - laser producers, very price sensitive, very cyclical.

charter, comcast - broadband, not cyclical, pricing power.

chevron, shell, oxy, phillips, lukoil, exxon, bp, many small producers - fragmented somewhat, but cyclical with no pricing power, yet why so many?

apple and android - pricing power, few alternatives, good profitability

boeing and airbus

regional supermarkets

 

are there some dynamics like regional vs global regulation, end markets?

recurring vs one time sales of high cost items or services?

In a way intel and amd are the only 2 choices, as are android and ios, yet the latter are hugely more profitable even though every computer you buy probably has one of those 2 chips. Of course one buys a computer far less frequently than an app in the store.

 

[BG2008]

You can add United Rental and Sunbelt to the equipment rental business.  It's a very good business and they are taking share from smaller mom and pop with less than 1% share. 

[bizaro86]

Charter and comcast aren't really a duopoly imo, they are more like non-overlapping local monopolies. Barriers to entry are huge.

 

I think that is the answer to your question actually - barriers to entry. Oil a d gas is fragmented because there are no barriers to entry. I could start an O&G co pretty easily. By comparison, starting a plane manufacturer has huge barriers to entry. Even if you succeed designing and manufacturing a great airplane (hard!) Without worldwide support it's hard to sell. (Eg Bombarider cseries didn't succeed until it became the A220 with Airbus support)

[KJP]

Charter and comcast aren't really a duopoly imo, they are more like non-overlapping local monopolies. Barriers to entry are huge.

 

I think that is the answer to your question actually - barriers to entry. Oil a d gas is fragmented because there are no barriers to entry. I could start an O&G co pretty easily. By comparison, starting a plane manufacturer has huge barriers to entry. Even if you succeed designing and manufacturing a great airplane (hard!) Without worldwide support it's hard to sell. (Eg Bombarider cseries didn't succeed until it became the A220 with Airbus support)

 

Agreed re: Charter and Comcast.  The service they provide requires physical infrastructure in specific locations, so their businesses are limited to specific geographies.  They are not a duopoly because they largely don't compete with each other in the same geographies.  Instead, the relevant duopoly in that industry (broadband and video) usually is the local cable co and the local telco. 

 

Along the same lines as "barriers to entry," look at economies of scale and minimum efficient scale in an industry.  If you need 33% of the market to have the minimum efficient scale necessary to be competitive, then the market will trend towards very few competitors.  If you only need 1% of the market to have minimum efficient scale, and the benefits to additional scale taper off quite rapidly, then you're likely to have many competitors.  In the broadband/video example, there are very large economies of scale (high fixed costs/high incremental margins), so each geographic area tends to have very few competitors.  In the oil/gas example, minimum efficient scale is low.

 

Your supermarkets example is similar.  Supermarkets are essentially logistics businesses in which local (not national) economies of scale are critical.  For example, having 50% of the grocery business in Los Angeles won't help you in New York, and vice versa.  That is why the industry has many strong regional players. 

 

Now consider an industry like homebuilding.  Minimum efficient scale is low, so you have many, many homebuilders.  But there may be some regional economies of scale.  You can see that in NVR.  So, look at how that business has expanded over time -- typically its into adjacent geographies, rather than a hodgepodge of disconnected regions around the country, because scale in Portland isn't going to help you in Orlando. 

 

As for why are some true duopolies and oligopolies still cyclical and price sensitive, that is likely because they have high fixed costs and their end markets are cyclical.  So, when end market demand declines there will still be strong competition for business, because of the high fixed cost/high incremental margin nature of the industry. 

[LongHaul]

Barriers to entry. 

[SharperDingaan]

Porter strategies.

 

SD

[Guest cherzeca]

Staples and Office Depot is a situation where they initially split the US geographically and understood that it made sense for them to roll out in their separate areas first.  then they got so big that they couldn't help but to compete, especially as the retail stores increasingly became shipping points.  so profitability and ability to scale.

 

 

[scorpioncapital]

What I gather from this discussion is that this is a dynamic process. Companies that had advantage may at some point become victims of their own success. Is it also possible that the mere threat of new entrants causes a few existing giants to always be price takers? It seems incredibly difficult to maintain a barrier to entry or advantage forever except for a very few privileged few.

 

[SharperDingaan]

What I gather from this discussion is that this is a dynamic process. Companies that had advantage may at some point become victims of their own success. Is it also possible that the mere threat of new entrants causes a few existing giants to always be price takers? It seems incredibly difficult to maintain a barrier to entry or advantage forever except for a very few privileged few.

 

Most duopolies will have at least one party, competing on economies of scale.

The party has to essentially be the industry 'standard' setter, and positioned to sell large quantities of 'standard' product; making it very fragile to disruption. The bigger the party, the more moving parts, the harder it is to turn the ship, and the more opportunity for error. And just to maintain the current share price - the market expects perfect execution, all the time.

 

Of course, .... sh1te happens, and routinely. :D

Suggesting that the smarter strategy may well be to just bet on routine failures, swing trade the hits and misses over time, and simply reinvest the gains in a progressively bigger position. Particularly if the party is also a dividend payer, as it often the case.

 

SD